Professionalizing Your Defense Company’s Benefits

Like many parts of your defense company, what works for benefits with your first 1 or 2 dozen employees may not all scale as you grow past that. Early employees are often more forgiving and joined you understanding your benefits are a work in progress.  Later, candidate new hires won’t share those traits.  Even though you are a smaller company they will expect you to compete ( at least ) with larger companies.  Compete doesn’t mean the only dollar for dollar.  It also often means understandable processes and policies.  People are savvier than ever regarding what non-compensation offerings you will be providing and when.  So ‘ad-hoc’ won’t work anymore. They need a deterministic plan they can evaluate.

Most companies have a pool of costs they identify as “Fringe”.  These include things like insurances, retirement matching, vacation, various other paid leaves, and other miscellaneous offerings.  There is only so much your dod focused company can afford to pour into this category before it becomes a zero-sum game.  Everything becomes a tradeoff because it’s hard to grow that relative fringe rate of cost. Whatever you do, think about your company at a size that is double what it is today.  It’s easier to build a sustainable plan than one that has to be redesigned at every big growth step.  The founder often thinks of those as “good problems to have”.  Too many good problems will still add a great deal of friction to your company thriving. So, try to avoid “good problems to have” when you can, through foresight.

Insurances –

You may already have employee benefits packages for medical, dental, disability, life, vision, others.  They get more complex with scale though.  They also tend to have a higher increase in costs than inflation every year.  This is likely one of your highest expenses in the company so be diligent as you grow.

• Plan designs, especially for health, are far more complex than what is the deductible and copay and how much is the employee contributions.  There are dozens if not hundreds of things determined by your design.  How are certain medical procedures treated?  How are the networks defined?  What are the prescription formularies?  What procedures are considered experimental and not covered?  And so many more.  Get help from a good insurance broker partner that you trust.  Early treatment of small companies is often so much simpler.  Do get complacent as you grow and only try to scale that simplicity.  Keep in mind that adding other geographic locations tremendously adds to this complexity.

• Go to market every 2 or 3 years with a detailed RFP that highlights the things you care most about.  Be prepared to go to the market on anoff-year when your provider gives you a massive and unexpected raise in your rates.  Remember that it takes a lot of calendar time to select and change providers. Don’t let that calendar undermine your leverage in the market by realizing too late you need to look elsewhere.

• If you have a large and relatively healthy population research self-funded or partially self-funded health plans. You’ll likely need a track record of low claims for this to make sense.

• Research and consider Health Savings Accounts for your employees ( HSA )

401K –

Again, you may already have a robust and scalable 401k plan. The bigger you get the more important this plan becomes.  The biggest cost variable is how much your company will contribute to the employee and how.  Things to consider as the plan grows through include:

• Understand the fees both your company and your employees are paying.  Even though the employee-based fees are not coming from your fringe pool you need to be a good steward and manage those costs on their behalf.  Many are savvy and will know where your plan fits against other companies.
• Look at your vesting criteria for the company contribution portion. If it’s too high people will discount this benefit.  Workforces are so much more transitory than they’ve been in the past.  Don’t make it too low though.  Two- or three-year vesting periods at least, will give your employee a chance to get settled and embedded in your culture deciding they want to stay longer. 
• Develop an Investment Committee to help provide the company with better quality plan designs reflecting your workforce, an avenue for education for your workforce, and some liability protection.  Employee lawsuits revolving around 401ks have increased over the years.  This can be mitigated by having a deterministic process governed by an Investment Committee.  You can chair that committee if you’d like.  Or you can delegate it to a trusted internal or external resource.
• As the assets managed in your 401k grow, consider a third-party financial planner.  They can help take many things off your plate.  Employee education and individual retirement planning assistance, plan design and going to the market, manage your record keepers, run your investment committee rhythm, etc.

Education and Technical Certifications –

Unlike the above two employee benefits, tuition assistance and certification subsidies are not a broad use benefit.  These are usually a needed and useful benefit but will only be used by a subset of your workforce.  Some things to consider in this area:

• Technical Certifications are complex and can quickly grow in cost well beyond your plan and budget.  Think scalability when you design your policies.
• Speaking of policies, have clear ones that make it easier to remove ambiguity on what you will cover, what an employee will be responsible for and how you treat customer-funded training and certifications.
• Many certifications have an ongoing “continuing Education” requirement.  These aren’t hard to oversee for a couple of people but scale into unwieldy and difficult to manage bureaucracies as you grow.  Keep that in mind when you develop your plan and policies.

Professional Employer Organizations (PEO) –

PEOs can be useful for a specific size of a company.  One that has gained some traction but is not yet big enough to get a bundled set of buying power and options.  They aren’t for everyone but can definitely offload a whole set of HR and benefits-related functions, for a fee.  They also provide you the advantages of scale before you have it. A couple of general things to consider:

• Some of the features a PEO can provide you are: benefits at scale, HR admin and payroll, risk management, HR-related compliance, HR support, HR systems, and technical support via HRIS.

• Obviously, you will have less detailed control over individual product solutions than if you did it all yourself.  Research not just the PEO pricing and styles but the control points you will or will not have.

• PEOs are not forever.  If you keep growing, you will grow out of its usefulness.  Plan well in advance for that.  It will be a necessary but hard transition year from now when that time comes.

Paid Time Off (PTO ), Vacation, Holidays

You want your people to be healthy and have an excellent work-life balance.  PTO, another term for vacation these days, is another of your costly expenses in your local company.  They are critical though.  A couple of thoughts as you grow:

• A recurring theme unfortunately in your stage of growth – Have better policies.  They need to be very clear and understandable.  If people get different amounts of PTO you need to be clear, policy-wise, why.  If you make a habit of negotiating different PTO benefits with new hires, make sure those are documented according to your policy.

• Everyone doesn’t celebrate or mark with importance, the same holidays.  One technique to help individuals optimize their time off personally is the use of Floating Holidays in place of some of the standard federal holidays.  This allows them to use that time to enjoy their personal cultural or religious, or even personal family times customized to them as individuals without costing you additional expense.  When developing these floating holiday practices, be deliberate and consider teamwork dynamics, especially if you provide employees on a customer site.  The customer often expects you to align your holidays with theirs.

• Stay up to date on regulation changes as you graduate in size. Remember that there are both federal and state laws that will govern you.  As a federal contractor, you will be subject to even additional regulations as you grow. Make sure you know what your budget and responsibilities are for things like:
  • FMLA
  • Jury duty
  • Reserve duty
  • Sick pay
  • Bereavement leave
  • Other

Employee Bonuses –

As you grow it becomes very important for you to have a deterministic and scalable bonus practice.  Early ad-hoc stuff won’t cut it.  Don’t just think about this stage.  Think about yourself at 3- or 4-times today’s size. Would your practice still work?   Some thoughts on this if you choose to do any employee bonuses:

• Set expectations each year.  You do not want people to treat bonuses as expected normal compensation.  Typically, merit bonuses occur when people go above and beyond their normal good job.  They should be special.  Merit bonuses do not reward mediocrity or below-average work.
• DCAA will require strong procedures and the underlying policies the bigger you get regarding employee bonusing. This is one of the most questioned costs by the federal government so have your ducks lined up backing up how you do it.
• Spot bonuses given after success are very good ways to recognize someone and show you are paying attention.  Do it very soon after the event though, to maximize the happiness it brings as well as incentivize more of that behavior in the future. It’s not always money.  Sometimes giving out company apparel or branded stuff for small victories kills more birds with one stone.

Think about the Future –

Even though you aren’t thinking about your company exit right now, think about it.  These employee benefits and HR department improvement suggestions above will all need to be integrated with other companies someday.  Are there things you do now that will make that easier or harder?  Yes.  It’s all about tradeoffs.  On one hand, being totally special helps you stand out.  On the other, those things can cause issues in a later integration, devaluing your company. Just consider it and make the choices that are best for your company.

Obviously, there is so much more to say about employee benefits.  This is just some food for thought to stimulate your thought process.  Every company in the defense contracting industry is different and must make choices based on their circumstances.  Specific choices made by us have been left out on purpose. We are always happy to discuss one-on-one though.  If you’re looking for direct assistance with employee benefits and improving your own business’ HR department, contact High Stakes here. We’d be happy to schedule a conversation with you to begin professionalizing your company’s employee benefits today.